In IAA Vehicle Services Ltd v HBC Ltd, the High Court was asked to determine whether non-payment of the deposit on exercising an option amounted to a repudiatory breach of the resulting sale contracts.
The claimant was a tenant occupying three commercial properties on three separate leases. The leases did not exclude security of tenure provisions of Part II of the Landlord and Tenant Act 1954 (the Act). All three leases granted the tenant the option to acquire the freehold interest for a price fixed when the leases were granted in 2013. The options were to be exercised before the contractual end of the lease term by serving notice on the landlord and paying a 10% deposit into the landlord's conveyancer's bank account.
A week before the contractual termination of the leases, the tenant served notices exercising the option for all three leases. The terms of the leases provided that on service of the notices, contracts of sale came into effect and, therefore, the deposit became payable under the applicable Standard Commercial Property Conditions. The option period expired with the deposit unpaid. The defendant wrote to the claimant asserting that failure to pay the deposits by midnight on the day the options were exercised amounted to a repudiatory breach entitling the defendant to treat the sale contracts as terminated.
The tenant applied to Court for a declaration that the validly served notices are binding on the landlord and seeking an order for specific performance, requiring the landlord to transfer its interests in the three properties. According to the claimant, the deposit could not have been due on the day the options were exercised as time would have been required for some form of correspondence at least for provision of the bank details.
In his judgement, Judge Hodge KC considered three questions:
1. When did the obligation to pay the deposit arise?
The court found in favour of the landlord because the leases expressly stated that the sale contracts come into existence "upon valid exercise of the options" and the deposit was therefore payable no later than the date of the contract in accordance with the Standard Conditions. The landlord was not obliged to volunteer the bank details into which the deposit is to be paid; it was incumbent upon the tenant to take all necessary preparatory steps to ensure compliance with its obligations.
2. Whether time was of the essence for payment of the deposit
To this question, the court found in favour of the tenant because payment of the deposit followed the exercise of options rather than an ordinary contract for sale of land, holding that the case fell outside the ordinary run of cases. In contrast to an ordinary sale of land or even exercise of an option by strangers, here exercise of the options did not fetter the landlord from dealing with the property as the leases still continued for the remainder of the term any statutory continuation under the Act, so the landlord continued to gain income from the rent. The judge distinguished this case from the Court of Appeal case of Samrenko.
3. Whether failure to pay the deposit by midnight on the day the options were exercised constituted a repudiation of the contract?
The court held, on the basis the obligation to pay the deposit on the day the options were exercised was not a condition to the sale contract, in the circumstances the claimant's failure to pay the deposit did not amount to the repudiation of contract.
This case considers the role of a deposit and distinguishes an option where parties are already in contract, such as the landlord and tenant scenario present on these facts, from a requirement elsewhere for strict performance of obligations to pay deposits to demonstrate a level of commitment to the relevant contract from the paying party. Best practice remains to comply fully with contractual requirements and Special Conditions. The case was heard in the High Court and distinguishes a Court of Appeal case on the facts. Permission to appeal was granted by the judge and the time limit to do so extended, so an appeal may follow. Watch this space.
